According to leading insurer Aegon only 6% of policyholders write their life insurance in trust, despite it being completely free. This may be because so few people are aware of the option when taking out life cover.
However, there are many potential advantages to writing your policy in trust that could be worth thousands of pounds to your loved ones, which we will explore in this post. There are also some disadvantages which means it is not a suitable option for everyone.
Let’s delve into the detail…
What is writing your life insurance policy in trust?
By writing your life insurance in trust you are signing over the rights of your policy to a trustee/s to administer on your behalf after you are gone. Much like the executor of a Will.
A trustee could be dependable friend, family member or even a legal professional… anyone you would be happy to leave in charge of your life insurance to carry out your wishes for the benefit of your loved ones.
Pros and Cons of writing your policy in trust
Pros
- Writing your life insurance in trust detaches it from your legal estate, meaning the proceeds from a future pay out are not subject to inheritance tax (IHT). IHT in the UK is currently charged at 40% on anything over £325,000; and when you consider an estate includes any property, savings and possessions, it is easy to exceed this threshold.
Writing your policy in trust therefore ensures your loved ones benefit from 100% of your selfless investment in life insurance; minimising the level of IHT paid or potentially even avoiding it altogether (depending on the value of the estate). - As a pay out does not form part of your estate if written in trust, your beneficiaries will also not have to wait for probate to be granted (usually taking 6-9 months) before the funds are released. This means a faster pay out, which could help your family with significant fees such as the funeral costs (average cost £3,953).
- The third main benefit is that it can give you greater control on who receives the funds and importantly when, (depending on the type of trust). For example, you could instruct your trustee/s to split the proceeds of a pay out evenly between your children, but only after each of them turn 18 years of age.
Cons
- Sometimes it can be difficult to cancel the trust once set up. It is vital that you understand the terms of the trust before deciding if it is right for you.
- Once a policy is written in trust, any future decision regarding the policy will need to be signed off by the trustee. For example, if your circumstances change and you want to increase your pay out amount or change how the funds are divided, the insurer can only take instruction from the trustee.
- Some forms of trusts are less flexible than others. For example, with an ‘absolute’ trust, you will not be able to amend the named beneficiaries if your circumstances change, for example you divorce and then remarry or if you have more children.
Next steps
If you decide that writing your policy in trust is a good option for you, then what’s next? To start you must create a trust deed, which is a legally binding document which states the parties that make up the trust, the trust terms, and the trust beneficiaries.
Some insurers and even life insurance brokers offer free services to help with this trust application process. For example, life insurance broker Reassured offer a free trust writing service on most of the policies they sell, they can also answer any questions you may have and unpick the jargon.
So there we have it, the pros and cons of writing your life insurance in trust. We hope this article has been helpful, however please do not take the information as financial advice and if you are unsure on next steps seek your own legal advice.
Sources:
https://www.reassured.co.uk/trust
https://www.sunlife.co.uk/funeral-costs/
